All right, so we may be sitting here and wondering why it’s so hard to get our own money out of the 401k. We could think of this as a hurdle, but really we should think of it as a favor because when we put money into our 401k we are forcing ourselves to save for retirement. This is a benefit that too many people don’t take advantage of, and ultimately regret when they actually want to retire.
While we suggest you let the money in your 401k grow, sometimes life throws you curve balls and you just need that extra cash flow. Below are the best ways to access your savings without accruing a tax penalty for when you really need it.

Unreimbursed Medical Bills – If you have medical expenses that are greater than 10% of your adjusted gross income, and they unreimbursed deductible expenses (i.e. you have not been paid back and you can’t deduct them from your taxes) then you can take money out of your 401k for these. You have to do this in the year it happens.

Disability – You must be totally and permanently disabled to take out of your 401k without penalty… seems a bit rough.

Health Insurance Premiums* - This is starred because this really only exists for IRAs. You can take money out of your IRA once you have been unemployed for 12 weeks. Then the money can be used for health insurance premiums.

Death – This allows for heirs (with the exception of a spouse, which gets trickier) to take money out of the 401k without penalty.

First Time Homebuyers* - If you want to use your 401k savings for that first home, you will still have a 10% penalty… but if the money is in an IRA, that 10% penalty is dismissed. The caveat… you can only take out $10,000 total.

Higher Education Expenses* - Again, this is a scenario where the 401k will charge the 10% penalty, but an IRA distribution is penalty free. The bigger benefit is that the education expenses can be for you, your spouse, children, grandchildren or immediate family.

Paying yourself interest

Another option that can be utilized on 401ks is the ability to take loans from your account and pay yourself interest.

Although this sounds like a sweet option, we have to be careful on how we utilize it.

Most 401k plans allow for the employees to take a loan, but here is the caveat. There tends to be minimum amounts that must be taken and you can only take out the lesser of $50,000 or 50% of the vested amount in the account.

Say we have a $40,000 401k. We would be able to take a loan out up to $20,000 (50% of our vested amount).

The benefit of taking a loan from your 401k is that the plan doesn’t tend to care about why you are taking it or about your credit. You can also determine which fund (or funds) you want the monies to come from.

After you take your “loan” out, you then pay yourself the interest. The interest can’t be deducted for your taxes and the plan determines the rate (it tends to be lower).

Here is the kicker, though. If you take a loan and leave a company or are fired from the company and the loan hasn’t been paid off; well that amount will be taxed as ordinary income.

Bottom Line

Sometimes you need the money you have saved before you or anyone else ever thought. Hopefully you can access it in a way that will not cost you extra.